Financial disclosure and market reaction in a crisis situation.

The research question of this study is whether or not companies can improve the relationship with their investors by voluntarily extending the scope of their risk disclosure. The novel aspect of this research is that it analyses the relationship between companies and investors in a unique crisis situation. This thesis explains and tests the relationship between listed European insurance groups that disclose risk information in their annual financial statements and the reaction of the capital market during the recent sub-prime loan crisis. It covers the disclosure periods 2007 and 2008 of thirteen insurance groups that file their financial reports according to International Financial Reporting Standards (IFRS). Based on literature it is assumed that during a crisis situation investors estimate the value of the company they have invested in and decide whether or not they sell their shares or hold on to them. Research studies indicate that investors demand company-specific information about the investment risk, measurement of financial instruments and forecasts that are up to date and specific to the crisis situation. To analyses the relationship between listed companies and investors the thesis measures their disclosure performance and the capital market response towards it. A self administered risk disclosure performance index is used that is based on accounting disclosure requirements and specified to the crisis. It measures the discretionary disclosure of companies about mortgage portfolio-based financial instruments. These instruments caused financial distress of banks that spread to a global economic crisis. The thesis measures the reaction of the capital market towards the disclosed risk information by applying the event study methodology at the peak of the crisis situation. The statistical analysis of the relationship indicated that voluntary risk disclosure is not well recognized by investors as reported in the literature. It found out that investors had recognized those listed European insurance groups that have been most severely affected by the financial crisis. Investors came to that conclusion even before the researched companies disclosed risk information about their financial instruments in annual group financial statements. The statistical research has been extended using structured-interviews with experts that represent significant users of financial information. This qualitative approach seeks to verify and explain the statistical results. The results of the interviews with professional users of financial information such as financial analysts, managers of rating agencies and bankers have shown that they do not depend on risk information from annual financial statements of respective companies. They seek to get risk information in the event of a crisis by directly addressing the management of insurance groups. This enables them to gain comments on the impact of upcoming problems in the financial market from these managers. These results imply that theories about the relationship between disclosing companies and the capital market are different in crisis situations when psychological factors influence the behaviour of both companies and the capital market. These factors are difficult to separate and need further research. Practical implications of this research study arise for regulators and standard setters. (Abstract shortened by ProQuest.)